The UK’s ability to compete on the world stage is being tested by a complex set of influences, from Trump to the tech giants. But investing in innovation and regional growth can help Britain to thrive, writes the IoD’s senior economist, Tej Parikh
The global economic order is in a state of flux. The US, long the de facto custodian of international economic norms, is retreating from this role under Donald Trump’s “America first” doctrine.
China, now the world’s second-largest economy, is staking a huge claim on future trade flows with its ambitious Belt and Road Initiative (BRI).
And, as the EU continues to grapple with questions about its economic and political integration, a wave of populism is sweeping through many emerging markets. Meanwhile, the rapid rate of technological innovation is disrupting social dynamics, industrial relations and diplomacy the world over.
This complex and uncertain situation is the manifestation of two seismic international socioeconomic trends. First, globalisation, the powerhouse of growth across both the developed and developing worlds for the past three decades, is running out of steam.
Second, the dominant model of western liberal democracy, which has been entrenched since the end of the second world war, is being challenged. Indeed, the world’s centre of economic gravity is shifting eastward and the implications for “Global Britain” and its businesses, as they seek to capitalise on new opportunities and mitigate new risks while operating outside the EU, are profound.
The drivers of change
Globalisation has created both winners and losers. Urban hubs that have been able to benefit from the emergence of international markets have prospered, while industrial regions have faced competition from global supply chains.
Discontent among the latter group has fuelled the emergence of parties that speak the language of protectionism and nationalism. At the same time, the march of new technology and the global Faangs (Facebook, Apple, Amazon, Netflix and Google) has given rise to cross-border regulatory challenges and national security concerns.
Furthermore, there’s a growing emphasis on services, which are harder to trade than goods; international bank lending has still yet to recover fully from the 2007-08 credit crunch; and multinationals are finding it increasingly hard to manage their expansive business models. All of these forces are challenging globalisation.
Meanwhile, the shift in economic power away from the West has perhaps been inevitable. Along with rapid population growth, the emerging middle class in Asia (especially China and India) and Africa is driving wealth creation and unleashing the potential of developing markets.
Indeed, China is transforming itself from the workshop of the world into a global consumer and investor. Its expenditure on road, rail and other infrastructure projects under the BRI alone in the next five years could be about £620 billion.
The rise of the East has come just as productivity growth among the advanced nations of the West has stuttered. Although this deceleration was always expected, bigger questions are arising about the effectiveness of the West’s marriage of capitalism and democracy, particularly in preparing its economies for the demands of the fourth industrial revolution.
The prospects for Britain
About a third of British business leaders responding to the IoD’s Policy Voice surveys believe that the current state of the global economy presents a serious challenge to their enterprises. A key component of this is the increasing influence of international political events on cross-border trade.
On top of Brexit, the EU – our largest trading partner – is holding parliamentary elections at the end of May. These are likely to give nationalist parties stronger representation in Brussels, which in turn has implications for the EU’s trade and growth policies.
Moreover, Trump is a president without precedent. His rule-by-tweet approach and his ongoing protectionist skirmishes are adding to the volatility that international businesses have to manage in currency and stock markets.
The West’s regression as an exemplar and promoter of liberal free-market values is having a significant impact too. Political rights and civil liberties have continued to decline across the globe over the past decade, according to Freedom House, a think-tank funded by the US government.
Populism and nationalism are taking hold in once-promising emerging economies, where questionable styles of government have heightened both political instability and the reputational risks facing western companies operating in those territories. The Brics, Indonesia, the Philippines and Turkey are among the nations where British companies are reporting particular concerns.
In the face of these strengthening geopolitical headwinds, there has been a notable trend towards bringing activity closer to home. Now intra-regional trade and investment is on the rise. The world that Global Britain hopes to open up to could be increasingly regionalised.
When China sneezes…
The biggest exporter in the world and the second-biggest importer after the US, China has become a barometer of the global economy.
Even though this emerging superpower continues to amass influence in the developing world through its BRI investments, its growth engine finally looks to be stuttering after a decade of breakneck progress, just as the nation is trying to shift towards a consumer-driven economy.
Debt levels are elevated, not to mention distressed, while trade tensions heighten as Beijing continues to butt heads with Washington over import tariffs. China’s notorious opacity about its economic data is also causing jitters around the world.
As global growth becomes ever more sensitive to developments in China, the UK will need to monitor levels of risk in its export markets carefully. Germany, a big importer of British goods and services, is on the brink of a recession partly as a result of China’s slowdown, for instance.
A new model economy
How should the British government respond to all these risks? One widely touted idea is that the country should follow a Singaporean model and attract global service providers by offering them a low-tax, hi-tech environment.
That may be less than workable for several reasons. To name but three, the UK is not a young, small city state; its population is almost 12 times larger than Singapore’s; and it has a far more diverse industrial landscape.
The new model for Global Britain will need to account for the country’s regional variations, building on existing strengths while prioritising national agility. Although specialisation has long been our macroeconomic archetype, diversification will become increasingly important in ensuring our economic stability.
We also need to prioritise innovation. The UK’s future competitiveness depends on whether we can play a leading role in this disruptive age of exponential technological development. US futurist Ray Kurzweil argues that a 20th century’s worth of progress happened in 2000-14 and that another 20th century’s worth of progress will happen by 2021.
The government’s long-term goal of increasing investment in research and development to three per cent of GDP is a step forward. But, while the UK has always been strong on the research part – thanks largely to its world-class universities – the development aspect has been weaker.
The successful commercialisation of ideas is crucial in this respect. The UK’s strong entrepreneurial culture and emerging digital sector represent a perfect launchpad for hi-tech start-ups, but strengthening ties between academia and business will truly help this country to stay ahead of the curve.
Although fostering an R&D culture is necessary, this is not enough on its own. It’s also vital that we gain a firmer grasp of regional geopolitical risks as new economic centres emerge and it becomes harder for us to access global markets, supply chains and partnerships while nationalism amps up.
Part of this effort, as the Anglosphere’s cultural and linguistic currency and dominance is challenged, will involve boosting our “global competencies”. The government already estimates that weak language skills cost our economy £50 billion a year in lost contracts alone, but change is afoot: 2018 was the first year in which A-level students taking Mandarin outnumbered those taking German.
Strong support for innovation will enable the UK to develop higher value-added industries, reduce its dependence on professional services and pursue new export opportunities.
Meanwhile, harnessing global skills – including the knowledge that immigrants bring to our shores – will be essential in building international ties as new risks and complexities arise. This will provide the requisite platform from which the UK can invest in, and trade with, territories with high growth potential.
The answer within
Ultimately, Global Britain will need to look inward as much as it does outward if it is to prosper in an uncertain world. Indeed, half of all British citizens believe that the UK’s sociopolitical system is broken, according to the 2019 Edelman Trust Barometer report.
Addressing regional variations in the country’s resilience to global forces is key here. The UK is one of the most geographically imbalanced nations among the G7.
Stark differences in prosperity have caused rural, coastal and post-industrial Britain to adopt a different viewpoint from that of the nation’s more cosmopolitan urban centres of finance and research.
Improving skills development across the country, revamping infrastructure and investing in the varied strengths of the UK’s diverse regions will be essential in tackling disillusionment and unleashing the trading potential and international attractiveness of British regions beyond London. This will help the whole country to build its resilience to global risks.
A Global Britain that’s looking beyond its European neighbourhood faces a world undergoing a profound transformation. As long-held economic and political models get rewritten or ripped up and new international partnerships and risks emerge, uncertainty will become the norm.
But the UK will be able to thrive in this environment if it can build global skills, stay at the leading edge of innovation and get its own house in order.
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